Fiscal Cliff Talks Dominate Gold ETFs

December 17th at 1:10pm by ETF Securities

The US ‘fiscal cliff’ and Europe growth risks are the dark clouds over an otherwise improving outlook for the “industrial” precious metals.

US industrial production rose 1.1% m-o-m in November, far higher than the 0.3% consensus expectation and is likely to maintain that momentum judging by the flash December Markit manufacturing PMI which rose to an 8-month high.

The flash HSBC Chinese manufacturing PMI rose to a 14-month high of 50.9, confirming the economic recovery is gaining momentum in China as well. Normally, the more cyclical precious metals such as silver, platinum and palladium should perform well in this environment.

However, businesses remain reluctant to invest because of the uncertainty surrounding potential automatic tax rises and benefit cuts if the US Congress doesn’t agree to a new fiscal program. With minimal economic data to be released in the final weeks of the year, the markets will be particularly sensitive to outcomes from the budget negotiations. Holdings of gold ETPs extended their all-time highs to $84.6bn as investors continue to hedge against worst-case outcomes from fiscal cliff discussions.

FOMC announces extension of QE3 and confirms its commitment to lower unemployment. The Fed confirmed that it will be replacing “operation twist” with $45b of monthly purchases of longer-dated treasuries from January 2013 (in addition to the $40bn of MBS currently purchased every month). Although the move was already largely priced into precious metals, the Fed’s actions are significant as they will see balance sheet expansion (whereas operation twist simply changed the maturity of existing assets). Importantly, the Fed has made its ultra-accommodative policy conditional on unemployment remaining above 6.5% and inflation projections remaining no more than 2.5%, providing substantial leeway for continued expansionary policy.

More aggressive action from the Bank of Japan to come in 2013. The victory of Abe of the LDP in last week’s elections is likely to see more aggressive fiscal and monetary policy from Japan. Haven asset buying could follow, which would benefit precious metals, particularly gold.

European car sales weigh negatively on platinum demand. European car sales fell 10% in November, bringing European Union car registrations to a 19-year low. The euro area which has been in recession since Q3 2012 and is saddled with structural debt problems is struggling to lift demand for consumer durables. Demand for platinum used in diesel autocatalysts is likely to continue to suffer.

Key events to watch this week: US fiscal negotiations. With relatively little economic data out this week, investor focus will remain on US budgetary discussions. The Bank of Japan will meet this week, but it is unlikely to be influenced by the LDP win at this early stage.

Tickers